<PAGE>   1

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION

                              WASHINGTON D.C. 20549

                                    FORM 10-Q

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
         EXCHANGE ACT OF 1934

         FOR THE TRANSITION PERIOD FROM                TO
                                        --------------    ---------------------
         COMMISSION FILE NUMBER 1-12607

                            KRUG INTERNATIONAL CORP.
             ------------------------------------------------------
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

<TABLE>
<S>                                                                      <C>
                    Ohio                                                     31-0621189
---------------------------------------------                            -------------------
(STATE OR OTHER JURISDICTION OF INCORPORATION                             (I.R.S. EMPLOYER
                OR ORGANIZATION)                                         IDENTIFICATION NO.)
</TABLE>

            900 Circle 75 Parkway, Suite 1300, Atlanta, Georgia 30339
            ---------------------------------------------------------
                    (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
                                   (ZIP CODE)

                                 (770) 933-7000
                             ----------------------
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)


         Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filings requirements for the past 90 days.


Yes [X]       No


         The number of Common Shares, without par value, outstanding as of
August 5, 1999 was 4,977,530.


<PAGE>   2


PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (DOLLARS IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                     JUNE 30,       MARCH 31,
                                                                       1999           1999
                                                                     --------       --------
<S>                                                                  <C>            <C>
                                     ASSETS
Current Assets:
     Cash and cash equivalents                                       $  1,654       $  2,680
     Restricted cash (Note 2)                                           4,991          6,641
     Receivables - net                                                  6,020          7,174
     Inventories                                                        4,722          4,959
     Prepaid expenses                                                     948            778
                                                                     --------       --------
         Total Current Assets                                          18,335         22,232

Property, Plant and Equipment, At Cost                                 11,630         11,724
     Less accumulated depreciation                                      5,952          5,796
                                                                     --------       --------
         Property, Plant and Equipment - Net                            5,678          5,928

Pension Asset                                                           1,514          1,567
Other Assets                                                                9             15
                                                                     --------       --------
            Total Assets                                             $ 25,536       $ 29,742
                                                                     ========       ========

                      LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                                $  7,671       $ 10,129
     Accrued expenses                                                   4,125          4,345
     Income taxes                                                          79            199
     Net current liabilities of discontinued operations                   400            400
     Current maturities of long-term debt                               5,002          5,347
                                                                     --------       --------
         Total Current Liabilities                                     17,277         20,420
Long-term Debt                                                            900            931
Net Non-Current Liabilities of Discontinued Operations                    896            911
                                                                     --------       --------
            Total Liabilities                                          19,073         22,262

Shareholders' Equity:
     Common shares, no par value:
         Issued and outstanding, 4,977,530 at June 30, 1999
            and 5,256,230 at March 31, 1999                             2,489          2,628
     Additional paid-in capital                                         3,605          4,829
     Retained earnings                                                    997          1,589
     Treasury shares, at cost, 278,700 shares at March 31, 1999            --         (1,363)
     Accumulated other comprehensive loss                                (628)          (203)
                                                                     --------       --------
                Total Shareholders' Equity                              6,463          7,480
                                                                     --------       --------

                    Total Liabilities and Shareholders' Equity       $ 25,536       $ 29,742
                                                                     ========       ========
</TABLE>

            See notes to condensed consolidated financial statements



<PAGE>   3

                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                  CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

<TABLE>
<CAPTION>
                                                       THREE MONTHS ENDED
                                                            JUNE 30,
                                                    -----------------------
                                                      1999           1998
                                                    --------       --------
<S>                                                 <C>            <C>
Revenues                                            $ 11,428       $ 11,744

Cost of Goods Sold                                     9,970         10,929
Selling and Administrative Expenses                    1,807          2,015
Restructuring Charges                                    222             99
                                                    --------       --------

Operating Loss                                          (571)        (1,299)

Other Income (Expense):
     Interest expense                                    (57)          (142)
     Interest income                                      82            116
     Equity in loss of Wyle Laboratories, Inc.            --           (123)
     Other income - net                                    1            176
                                                    --------       --------

Loss From Continuing Operations
     Before Income Taxes                                (545)        (1,272)

Income Tax Expense (Benefit)                              48            (38)
                                                    --------       --------

Loss From Continuing Operations                         (593)        (1,234)

Earnings From Discontinued Operations
         (net of tax of $55)                              --            348
                                                    --------       --------

Net Loss                                            $   (593)      $   (886)
                                                    ========       ========

Loss Per Share:
     Continuing Operations:
         Basic                                      $  (0.12)      $  (0.24)
                                                    ========       ========
         Diluted                                    $  (0.12)      $  (0.24)
                                                    ========       ========

     Net Loss:
         Basic                                      $  (0.12)      $  (0.17)
                                                    ========       ========
         Diluted                                    $  (0.12)      $  (0.17)
                                                    ========       ========

Average Common Shares Outstanding:
     Basic                                             4,978          5,215
                                                    ========       ========
     Diluted                                           4,978          5,215
                                                    ========       ========
</TABLE>

            See notes to condensed consolidated financial statements



<PAGE>   4


                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<TABLE>
<CAPTION>
                                                                   THREE MONTHS ENDED
                                                                         JUNE 30,
                                                                  ---------------------
                                                                    1999          1998
                                                                  -------       -------
<S>                                                               <C>           <C>
Net Cash Used in by Operating Activities                          $(2,180)      $(1,959)

Cash Flows From Investing Activities:
     Expenditures for property, plant and equipment                   (66)         (118)
     Proceeds from sale of Sowester Limited - net                      --         7,985
     Proceeds from sale of land                                        --           188
     Other                                                             --          (132)
                                                                  -------       -------
         Net Cash Provided by (Used in) Investing Activities          (66)        7,923

Cash Flows From Financing Activities:
     Purchase of treasury stock                                        --          (881)
     Payments on long-term debt                                      (360)         (215)
     Proceeds from exercise of stock options                           --           270
                                                                  -------       -------
         Net Cash Used in Financing Activities                       (360)         (826)

     Effect of Exchange Rate Changes on Cash                          (70)          100
                                                                  -------       -------
Net Increase (Decrease) in Cash                                    (2,676)        5,238

Cash at Beginning of Period                                         9,321         4,205
                                                                  -------       -------

Cash at End of Period                                             $ 6,645       $ 9,443
                                                                  =======       =======

Cash Paid For:
     Income Taxes                                                 $   170       $   325
                                                                  =======       =======
     Interest                                                     $    82       $   260
                                                                  =======       =======

Non-Cash Investing and Financing Activities:
     Capital leases                                               $    40       $   831
                                                                  =======       =======
</TABLE>


            See notes to condensed consolidated financial statements


<PAGE>   5


                    KRUG INTERNATIONAL CORP. AND SUBSIDIARIES
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                        THREE MONTHS ENDED JUNE 30, 1999
                             (DOLLARS IN THOUSANDS)

NOTE 1. -- BASIS OF PRESENTATION

         The unaudited Condensed Consolidated Financial Statements for the three
months ended June 30, 1999 have been prepared in accordance with Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission and, as such, do not
include all information required by generally accepted accounting principles.
These Condensed Consolidated Financial Statements should be read in conjunction
with the consolidated financial statements included in the Corporation's Annual
Report on Form 10-K filed on June 18, 1999. In the opinion of management, the
Condensed Consolidated Financial Statements, which are unaudited, include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the financial position and results of operations for the periods
indicated. The results of operations for the three months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
entire fiscal year or any other interim period.

NOTE 2. -- LONG-TERM DEBT

<TABLE>
<CAPTION>
                                      June 30,      March 31,
                                        1999          1999
                                      -------       -------
         <S>                          <C>           <C>
         U.K. Variable Rate Loan      $ 3,017       $ 3,236
         U.K. Term Loan                 1,498         1,571
         Capital leases                 1,004         1,161
         Finland Loan                     254           256
         Other                            129            54
                                      -------       -------
              Total                     5,902         6,278
         Less current maturities       (1,480)       (1,539)
         U.K. loans reclassified       (3,522)       (3,808)
                                      -------       -------
              Long-term portion       $   900       $   931
                                      =======       =======
</TABLE>

         The U.K. Variable Rate Loan commenced October 2, 1997 with a U.K. bank.
The loan is due March 31, 2003 and is payable in quarterly installments of $188
plus interest, at the bank's base rate plus 1.25% (6.25% at June 30, 1999 and
6.75% at March 31, 1999). The U.K. Term Loan is a ten-year loan, which commenced
in July 1995 with a U.K. bank. The loan has quarterly principal payments of $60,
plus interest, at the bank's base rate plus 1.5% (6.5% at June 30, 1999 and 7.0%
at March 31, 1999). The Finland loan commenced February 5, 1999 with a Finnish
bank. The loan is due February 5, 2002 and is payable in equal semiannual
installments of $43 plus interest at a fixed rate of 3.85% beginning August 2,
1999.

         Substantially all foreign assets (except shares of the foreign
subsidiaries) are pledged as collateral for the U.K. Variable Rate and Term
Loans. These loans include certain tangible net worth and cash flow covenants
relating to the foreign subsidiaries. In conjunction with these loans, the
Corporation has agreed to keep $7,708 of cash on deposit at the bank (of which
$2,717 has been offset at June 30, 1999 against outstanding bank overdraft
balances) until these loans can be renegotiated with new covenants more
appropriate for the current operating levels and to eliminate the cash deposit
requirements. Due to the current cash deposit requirements, the long-term
portion of the U.K. loan amounts of $3,522 have been reclassified as current
debt.



<PAGE>   6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 3. -- INVENTORIES

<TABLE>
<CAPTION>
                                         June 30,   March 31,
                                          1999        1999
                                         ------      ------
         <S>                             <C>        <C>
         Finished goods                  $1,520      $1,498
         Work-in-process                    842         965
         Raw materials and supplies       2,360       2,496
                                         ------      ------
                                         $4,722      $4,959
                                         ======      ======
</TABLE>

NOTE 4. -- INCOME TAXES

         The provision for income taxes is composed of the following:

<TABLE>
<CAPTION>
                        Three Months Ended June 30,
                        ---------------------------
                             1999       1998
                             ----       ----
         <S>                 <C>        <C>
         Domestic            $ --       $ --
         Foreign               48        (38)
                             ----       ----
                             $ 48       $(38)
                             ====       ====
</TABLE>

NOTE 5. -- OTHER INCOME -- NET

         During the three months ended June 30, 1998, the Corporation sold land
in Dayton, Ohio for a pre-tax gain of $176. This property was excess to the
Corporation's needs and had been listed for sale.

NOTE 6. -- RESTRUCTURING CHARGES

         The Corporation recorded a restructuring charge of $222 for severance
paid to 18 terminated employees of the European child safety segment in the
quarter ended June 30, 1999. The following is a summary of the provision for
restructuring charges:

<TABLE>
         <S>                                                  <C>
         Balance at March 31, 1999                            $ 680
         Provision for European Child Safety restructuring      222
         Payments for lease exit costs of vacated
           Housewares facility                                 (599)
         Payments for European Child Safety restructuring      (222)
         Other usage                                             (5)
                                                              -----
         Balance at June 30, 1999                             $  76
                                                              =====
</TABLE>

         The accrual balance at June 30, 1999 represented the estimated final
expenses of a leased office in Dayton, Ohio, which was vacated in October 1996.
The lease ended on June 25, 1999, but a final settlement of the lease has not
been reached with the landlord.

<PAGE>   7


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 7. -- DISCONTINUED OPERATIONS

         In prior years, the Corporation discontinued the operations and
disposed of substantially all of the net assets of its Industrial Segment.
Remaining obligations related to this segment include final costs under leases
of property in Knoxville, Tennessee (which expired December 31, 1998) and
product liability claims related to products sold before the disposal of the
Industrial Segment. In connection with settling the final obligations under the
leases in Knoxville, Tennessee, in December 1998, the landlord filed a lawsuit
concerning certain alleged maintenance obligations of the Corporation and one of
its subsidiaries and requesting relief from payment of a $200 promissory note
due to the Corporation by the landlord. In January 1999, the Corporation filed
suit against the landlord demanding payment of the promissory note, other
damages due to breach of contract and unjust enrichment and a declaration
regarding a payment from a former sub-tenant of the Corporation at the Knoxville
location. On June 9, 1999, the parties executed a memorandum of understanding
for the purpose of settling the litigation. No gain or loss is expected to be
recognized as a result of this settlement.

         On April 16, 1998, the Corporation sold its Leisure Marine Subsidiary
to a company formed by the management of the Segment. The purchase price
consisted of approximately $15,000, comprised of approximately $8,900 in cash
and the assumption of approximately $6,100 of debt. As a result of the disposal,
the Corporation reported a gain of $348 under discontinued operations for the
three months ended June 30, 1998

NOTE 8. -- TREASURY SHARES

         On April 9, 1999, the directors of the Corporation voted to retire the
278,700 common shares held as treasury shares by the Corporation.

NOTE 9. -- COMPREHENSIVE INCOME

         Effective April 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income." This Statement
requires that all items recognized under accounting standards as components of
comprehensive earnings be reported in financial statements. This Statement also
requires that an entity classify items of other comprehensive earnings by their
nature in an annual financial statement. Other comprehensive earnings for the
Corporation includes foreign currency translation adjustments. Total
comprehensive loss for the following periods were as follows:
<TABLE>
<CAPTION>
                                           Three Months Ended
                                         ----------------------
                                         June 30,      June 30,
                                           1999          1998
                                         -------       -------
         <S>                             <C>           <C>
         Net loss:                       $  (593)      $  (886)
         Other comprehensive
         Loss net of tax:
            Change in equity due to
            foreign currency
            translation adjustments         (426)         (125)
                                         -------       -------
         Comprehensive loss              $(1,019)      $(1,011)
                                         =======       =======
</TABLE>




<PAGE>   8


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 10. -- DOMESTIC DEFINED BENEFIT PENSION PLAN

         On July 1, 1999, the directors of the Corporation rescinded the
previously approved termination of the Corporation's domestic defined benefit
pension plan due to changes in business conditions and the economic environment
over the past year.




<PAGE>   9


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)

CERTAIN CAUTIONARY STATEMENTS

         In addition to historical information, Items 1 and 2 of this document
contains certain forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 including, without limitation,
statements regarding management's outlook for each of its businesses, the
sufficiency of the Corporation's liquidity and sources of capital and the impact
of Year 2000 issues. These forward-looking statements are subject to certain
risks, uncertainties and other factors which could cause actual results,
performance and achievements to differ materially from those anticipated,
including, without limitation, general economic and business conditions in the
U.S. and abroad, restrictions imposed by debt agreements, competition in the
housewares and child safety businesses, governmental budgetary constraints, the
regulatory environment for the Corporation's businesses, competition in the
acquisition market, changes in exchange rates, increases in prices of raw
material and services, the purchasing practices of significant customers, the
availability of qualified management and staff personnel in each subsidiary, the
functionality of the Corporation's computer systems, claims for product
liability from continuing and discontinued operations and operating performance
of minority-owned affiliates.

GENERAL

         During March 1998, the Corporation merged KRUG Life Sciences Inc. and
Technology/Scientific Services, Inc., its two subsidiaries which comprised the
Life Sciences and Engineering Segment, with Wyle Laboratories, Inc. ("Wyle") in
exchange for a 38% equity interest in Wyle plus cash and the assumption of debt.
The Corporation is reporting for the three months ended June 30, 1999 and 1998,
respectively, its equity in Wyle's income or loss as a single line item in its
condensed consolidated statements of earnings pursuant to APB No. 18.

         On July 22, 1999, the Corporation announced that it had reached an
agreement in principle to sell its Wyle Series A Preferred Stock for $4,000. The
sale is conditioned upon Wyle modifying certain terms of the Series B Preferred
Stock and stock options currently held and to be retained by the Corporation and
is subject to the negotiation of definitive agreements with the Corporation and
the other selling stockholders and certain other conditions. Assuming the
transaction is effected, the Corporation will report a pretax gain of
approximately $4,000 from the sale, which is expected to close in the second
quarter of fiscal 2000.

         In April 1998, the Corporation sold its Leisure Marine subsidiary and
the results of operations of the segment are included in discontinued operations
for the three months ended June 30, 1998.


<PAGE>   10


FINANCIAL SUMMARY
                                    THREE MONTHS ENDED


<TABLE>
<CAPTION>
                                              June 30,
                                     --------------------------
                                       1999              1998
                                     --------          --------
<S>                                  <C>               <C>
REVENUES:
Housewares                           $  7,681          $  8,255
Child Safety                            3,747             3,489
                                     --------          --------
                                     $ 11,428          $ 11,744
                                     ========          ========

EARNINGS (LOSS) FROM
CONTINUING OPERATIONS
BEFORE INCOME TAXES:
Housewares                           $     73          $   (388)(a)
Child Safety                             (186)(b)          (470)
                                     --------          --------
                                         (113)             (850)
Corporate expense                        (458)             (449)
                                     --------          --------
Operating Loss                           (571)           (1,299)
Interest expense                          (57)             (142)
Interest income                            82               116
Equity in loss of Wyle
      Laboratories, Inc.                                   (123)
Other income - net                          1               176
                                     --------          --------
Loss from Continuing
Operations before Income Taxes       $   (545)         $ (1,272)
                                     ========          ========
</TABLE>

(a) Includes restructuring charge of $99 for the quarter ended June 30, 1998.
(b) Includes restructuring charge of $222 for the quarter ended June 30, 1999.

RESULTS OF OPERATIONS

         Revenues of the European housewares segment for the first quarter of
fiscal 2000 decreased by $574 or 7.0% to $7,681 from $8,255 for the same quarter
in fiscal 1999. Decreased ladder sales and the unfavorable effect of foreign
currency translation of $248 were the causes of the housewares revenue decrease.
Sales volume increases were recorded in the current year in the laundry care,
children's safety gates and garden product groups as compared to the comparable
quarter in fiscal 1999. Revenues of the European child safety segment for the
first quarter of fiscal 2000 increased by $258 or 7.4% to $3,747 from $3,489 in
the same quarter of fiscal 1999. Increased sales resulted from the redesigned
child safety seats that were introduced in August 1999. The sales volume
increase was partially offset by a $114 decrease due to the unfavorable effect
of foreign currency translation.

         The Corporation recorded a restructuring charge of $222 in the quarter
ended June 30, 1999 for the severance paid to 18 terminated employees of the
European child safety segment. The reduction in staff was made to eliminate the
duplication of services at certain locations and to streamline the delivery of
the segment's products to customers. In the quarter ended June 30, 1998, the
Corporation recorded restructuring charges of $99 for costs related to a
facility vacated by the European housewares segment.

         Gross profit margin (revenue less cost of goods sold) increased to
12.8% for the quarter ended June 30, 1999 from 7.0% for the same quarter of the
previous fiscal year. The housewares


<PAGE>   11


segment gross profit margin increased to 9.0% from 4.7% last year. All product
lines had increased margins. The gross profit margin increases are the result of
increased operational efficiencies at the housewares segment's manufacturing
facility, which resulted from the organizational changes made during the second
half of fiscal 1999. The child safety segment gross profit margin increased to
17.4% from 12.6% from the same quarter last year. Increased sales volume and
operating efficiencies resulting from the previously discussed restructuring of
the segment resulted in the increased gross profit margin.

         Selling and administrative expense decreased by $208 in the quarter
ended June 30, 1999 from the same quarter of the previous fiscal year. The
decreased expense resulted from overhead reductions at the housewares and child
safety segments over the past year in response to lower than anticipated sales
levels and to reduce their breakeven cost levels.

         Interest expense decreased $85 from the prior year as a result of lower
U.K. interest rates and reduced U.K. debt levels. Interest income decreased $34
in the quarter ended June 30, 1999 from the same quarter of the prior year as a
result of lower interest rates earned and lower levels of cash invested.

         The Corporation recognized $123 as their portion of Wyle's losses in
the first quarter of fiscal 1999 under the equity method of accounting. At June
30, 1999, the book value of the Corporation's investment in Wyle was zero as a
result of recording a portion of Wyle's losses against the carrying value of the
investment. The Corporation's proportional share of losses incurred by Wyle
subsequent to the carrying value of the investment being reduced to zero are not
recorded by the Corporation but must be offset by an equal amount of earnings
before future income, if any, from the investment can be recognized. On July 22,
1999, the Corporation announced it had reached an agreement in principle to sell
its Wyle Series A Preferred Stock for $4,000. See the "General" section above
for further discussion of this agreement in principle.

          Income tax expense of $48 was recorded for the quarter ending June 30,
1999 for income taxes on profits in Finland and Sweden. No tax benefit has been
recognized for current losses in the U.K., Germany and the U.S. The Corporation
currently believes their future usage is less likely than not. The Corporation
recorded an income tax benefit of $38 in the fiscal 1999 first quarter. The tax
benefit is substantially less than the statutory tax rate due to losses incurred
in the U.K., Germany and U.S. for which current tax benefits were not recognized
due to the future usage of these losses being considered less likely than not.

         The loss from continuing operations was $593 ($0.12 per share) in the
first quarter of fiscal 2000 compared to a loss of $1,234 ($0.24 per share) in
the first quarter of fiscal 1999. The loss was reduced in the current year
primarily due to the operating profits of the European housewares and child
safety segments compared to operating losses in the comparable quarter of last
year.

DISCONTINUED OPERATIONS

         On April 16, 1998, the Corporation sold its Leisure Marine subsidiary
to a company formed by the management of the subsidiary. The purchase price
consisted of approximately $15,000 comprised of approximately $8,900 in cash and
the assumption of approximately $6,00 of debt. As a result of the disposal, the
Corporation reported a gain of $348 under discontinued operations for the three
months ended June 30, 1998.

         In fiscal 1989, the Corporation discontinued the operations of its
Industrial Segment and subsequently disposed of substantially all related net
assets. However, obligations remain relating to final costs under leases in
Knoxville, Tennessee (lease expired December 31, 1998)


<PAGE>   12


and product liability claims for products manufactured and sold before the
disposal of the Segment. The Corporation reviewed the provision for losses from
such discontinued operations during the quarter and no changes were deemed
necessary.

         In connection with settling the final obligations under the leases in
Knoxville, Tennessee, in December 1998, the landlord filed a lawsuit concerning
the maintenance obligations of the Corporation and one of its subsidiaries and
requesting relief from payment of a $200 promissory note due to the Corporation
by the landlord. In January 1999, the Corporation filed suit against the
landlord requesting payment of the promissory note, other damages due to breach
of contract and unjust enrichment and a declaration regarding a payment from a
former sub-tenant of the Corporation at the Knoxville location. On June 9, 1999,
the parties executed a memorandum of understanding for the purpose of settling
the litigation. No gain or loss is expected to be recognized as a result of this
settlement.

LIQUIDITY AND CAPITAL RESOURCES

         The Corporation used $2,180 of cash in operating activities during the
first three months of fiscal 2000. Cash was used to fund corporate expense and
provide working capital for the European operations.

         At June 30, 1999, the Corporation had outstanding debt of $3,017 under
a variable rate loan with a U.K. bank, the proceeds of which were used to
purchase Klippan Ltd. in October 1997. The debt is payable in quarterly
installments and matures in fiscal 2003. The Corporation also had an outstanding
term loan with a U.K. bank relating to the Beldray Ltd. manufacturing facility
totaling $1,498 which requires quarterly principal payments and matures in
fiscal 2005. The U.K. loan agreements are collateralized by substantially all of
the Corporation's U.K. assets, except for shares of the U.K. subsidiaries and
these loans include certain tangible net worth and cash flow covenants relating
to the U.K. subsidiaries. In conjunction with these loans, the Corporation has
agreed to maintain cash of $7,708 on deposit at the bank (of which $2,717 has
been offset at June 30, 1999 against outstanding bank overdraft balances) until
these loans can be renegotiated with new covenants more appropriate for the
current operating levels and to eliminate the cash deposit requirements. At June
30, 1999, the Corporation had no outstanding U.S. debt. The Corporation believes
it has adequate financing in both the U.S. and U.K. to support its current level
of operations.

IMPACT OF THE YEAR 2000 ISSUE

         Some older computer programs and systems were written using two digits
rather than four to define the applicable year (for example, 98 to denote 1998).
As a result, those computer programs have software which may recognize a date
using "00" as the year 1900 rather than the year 2000. This may result in
computer system failures or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, engage in manufacturing processes, or continue similar normal
business activities.

         State of Readiness - The Corporation recognizes the importance of the
Year 2000 issues and has given high priority to the planning and implementation
of Year 2000 solutions, including contingency planning. The Corporation has
underway a Year 2000 project to identify the programs and infrastructure that
could be affected by the Year 2000 issues and is implementing a plan to resolve
on a timely basis the problems identified. The Corporation's Year 2000 plan
generally may be broken into five interrelated phases: (i) evaluating existing
information technology ("IT") and non-IT systems of the Corporation, (ii)
implementing corrective actions to such systems (including testing), where
appropriate, (iii) evaluating the Corporation's exposure to third parties'
failures to adequately address Year 2000 issues, (iv) developing contingency



<PAGE>   13


plans with respect to such exposure, and (v) on-going vigilance with respect to
Year 2000 developments. As mentioned, the scope of the Year 2000 project
includes (i) IT systems such as software and hardware; (ii) non-IT systems or
embedded technology such as micro-controllers contained in various manufacturing
systems; and (iii) the readiness of key third parties, including suppliers and
customers, and electronic data interchange with those key third parties. The
evaluation phase of the Year 2000 project includes identifying IT and non-IT
systems or components that might malfunction or fail as a result of the Year
2000 issues.

         The Corporation currently has three primary operating locations
(Bilston, England, Carlisle, England and Helsinki, Finland) and each location
has a designated person responsible for coordinating Year 2000 issues for that
location. At the largest location, Bilston, England, the IT system is less than
two years old and the IT system, when purchased, was reviewed for Year 2000
compliance. The other two locations are smaller and will require new IT systems
(primarily local area networks) for approximately 25 users at each location.
Such new IT systems will be installed by the end of 1999. The non-IT systems
identified are primarily manufacturing and assembly systems. Key third parties
have been and will continue to be contacted to minimize the disruptions in the
relationship between the Corporation and such third parties because of the Year
2000 issues. While the Corporation cannot guarantee compliance of third parties,
the Corporation will consider alternate sources of supply in the event a key
supplier cannot demonstrate its systems or products are Year 2000 compliant.


         The Year 2000 project requires the Corporation to devote considerable
internal resources and hire consultants to assist with the implementation and
monitoring of the plan, and will require the replacement of certain equipment
and replacement or modification of certain software. The Corporation will also
be working with its customers and suppliers to ensure business continuity during
the potential problem period. In order to validate systems for Year 2000
readiness (both IT and non-IT systems), the Corporation has performed a number
of procedures, each as appropriate for the system being verified. For IT
systems, the Corporation has, where it is able, simulated the date change to the
year 2000 by resetting the system date to December 31, 1999 and then monitoring
the effects of the date change. For non-IT systems, the Corporation has been in
correspondence with the vendor or manufacturer and sought verification from them
that the system has been tested and not failed under Year 2000 conditions. Where
the Corporation has any doubt about the system's ability to deal correctly with
Year 2000 issues, contingency planning has been performed to evaluate the impact
on the business, alternatives to the system in question have been discussed and
the need for replacement considered. In addition, the manufacturers of all
equipment containing embedded circuitry purchased since November 1998 have
confirmed to the Corporation that such equipment was Year 2000 compliant before
the equipment was accepted. The Corporation has tested all IT systems and all of
the non-IT systems that can be tested, but the non-IT systems tested account for
only approximately 20% of all non-IT systems that may be affected by Year 2000
issues.

         The state of completion of each of the five phases and the
Corporation's action plan is as follows:

         Evaluating existing IT and non-IT systems of the Corporation - This has
been completed.

         Implementing corrective actions to such systems (including testing) -
The Corporation is currently testing the systems and the testing is
substantially completed.

         Evaluating the Corporation's exposure to third parties' failures to
adequately address Year 2000 issues - The Corporation is currently inquiring of
significant third parties as to their


<PAGE>   14


Year 2000 preparedness. Significant suppliers, customers and service providers
have been contacted and evaluated and will continue to be evaluated as to their
Year 2000 preparedness.

         Developing contingency plans with respect to such exposure -
Contingency plans have been completed.

         On-going vigilance with respect to Year 2000 developments - This
on-going process will not be fully completed until after the significant Year
2000 dates, both prior to January 1, 2000 and after, have passed.

         Costs to Address the Year 2000 Issues - The Corporation currently
estimates that the total cost of its Year 2000 project will be approximately
$200, which has been or will be expensed as incurred, and will also require
approximately $400 of capital expenditures. These costs include approximately
$200 of normal system software and equipment upgrades and replacements, which
the Corporation anticipated incurring in the ordinary course of business without
regard to the Year 2000 issues. The majority of these costs have yet to be
spent.

         Risks to the Corporation of the Year 2000 Issues - If the Corporation's
plan to address the Year 2000 issues is not successful or is not timely
implemented, the Corporation may need to devote more resources to the process
and additional costs may be incurred which could have a material adverse effect
on the Corporation's financial condition and results of operations. Problems
with the Year 2000 issues encountered by the Corporation's vendors and customers
may also have a material adverse effect of an uncertain magnitude on the
Corporation's financial condition and results of operations.

         The Corporation's Contingency Plans - As a component of its Year 2000
project, the Corporation has developed contingency plans to mitigate any
projected effects of problems experienced by it, key vendors and service
providers and customers in the timely implementation of solutions to Year 2000
problems. The Corporation has completed the contingency plans for each of the
three operating locations and will continue to correspond with its key vendors
and service suppliers and customers regarding their compliance plans for the
Year 2000 issues.

         The estimated costs of the Corporation's Year 2000 project and the
dates by which the Corporation expects to complete portions of its Year 2000
compliance program are based on management's best estimates and reflect
assumptions regarding the availability and cost of personnel trained in this
area, the compliance plans of third parties, and similar uncertainties. However,
due to the complexity and pervasiveness of the Year 2000 issues and, in
particular, the uncertainty regarding the compliance programs of third parties,
no assurance can be given that these estimates can be achieved and actual
results could differ materially from those anticipated.

The Euro Conversion

         On January 1, 1999, eleven of the fifteen member countries of the
European Union ("EU") established fixed conversion rates through the European
Central Bank ("ECB") between their existing local currencies and the Euro, the
EU's single currency. The Euro was adopted as their common legal currency on the
date. The Corporation currently operates in three countries which adopted the
Euro (Finland, France and Germany) and sells from the United Kingdom to certain
countries which adopted the Euro. The Corporation believes that the adoption of
the Euro has not had a material effect on the operations of its European
businesses.


<PAGE>   15


ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.



<PAGE>   16


PART II.  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

         On December 31, 1998, Springdale Partners, Ltd., an Ohio Limited
Liability Company, and Mada Corporation ("Mada") filed a Complaint in the
Chancery Court of Knox County, Tennessee, naming KRUG International Corp. and
KRUG Properties Inc. ("KRUG Properties") as defendants. The suit relates to
industrial property in Knoxville, Tennessee, that the Corporation sold to
Springdale Partners, an Ohio General Partnership, in December 1983. As part of
the transaction, KRUG Properties leased back a portion of the property from
Springdale Partners and the Corporation and KRUG Properties guaranteed the
obligations of Mada, the lessee of the other portion of the property. Mada was
required to use all reasonable efforts to sublease its portion of the property
on terms and conditions approved by the Corporation. As part of the purchase
price, Springdale Partners executed a $200,000 promissory note payable to the
Corporation due on December 31, 1998, which Springdale Partners failed to pay.
As part of its obligations, the Corporation was required to maintain the portion
of the property that it leased and return it on December 31, 1998 in as good
condition as it was in at the beginning of the lease, excluding ordinary wear
and tear and obsolescence. The plaintiffs requested a declaration from the Court
concerning the maintenance obligations of the Corporation and KRUG Properties
and the status of the $200,000 promissory note. The Corporation and KRUG
Properties filed a Motion to Dismiss this action. On January 25, 1999, the
Corporation and KRUG Properties filed a Complaint in the Common Pleas Court of
Montgomery County, Ohio, relating to this action and naming Springdale Partners,
its general partners and Mada as defendants. This case involves substantially
the same factual situation as the Knox County, Tennessee, case. The Corporation
requested the following relief: (1) judgement on the $200,000 promissory note;
(2) the award of damages due to breach of contract and unjust enrichment; and
(3) a declaration that a payment of $98,545 relating to a sublease belongs to
the Corporation and KRUG Properties. The parties agreed to stay the court
proceedings. On June 9, 1999, the parties executed a memorandum of understanding
for the purpose of settling the litigation. It is anticipated that the
settlement details will be completed in mid-August, 1999. No gain or loss is
expected to be recognized as a result of this settlement.

ITEM 5. OTHER INFORMATION

CORPORATE STRATEGY

     The Corporation's objective is to increase shareholder value by the
investment in and management of businesses which offer growth opportunities. The
Corporation evaluates its operating subsidiaries for growth potential and seeks
acquisition opportunities for the profitable employment of capital. The
Corporation's criteria for an acquisition includes whether the new business
presents an opportunity for increased value without regard to current
profitability.

     The Corporation currently intends to direct its long-term strategy towards
the acquisition, which may include minority interests, of companies in the
healthcare and technology areas, as broadly defined. The Corporation believes
the healthcare and technology areas offer an opportunity to participate in
future growth. The Corporation's initial strategic focus is expected to be
deliberately broad but may narrow as acquisition opportunities increase.

     In the short-term, the Corporation will seek and evaluate acquisitions
without regard to industry or profitability which it believes provide
meaningful U.S. operations and an opportunity to achieve cashflow.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

         (A) Exhibit 27 - Financial Data Schedule (for SEC use only)

         (B) Reports on Form 8-K - None.


<PAGE>   17


                                   SIGNATURES


         Pursuant to the requirements of the Securities Exchange Act of 1934,
KRUG International Corp. has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.

                                    KRUG International Corp.

                                    By:    /s/ Mark J. Stockslager
                                        -------------------------------
                                        Mark J. Stockslager
                                        Principal Accounting Officer



Dated:   August 11, 1999